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China Airlines reduces reliance on fuel hedging

China Airlines Ltd (華航), Taiwan's largest carrier, has reduced fuel hedging by about 67 percent because "volatile" prices have made the cost of the contracts riskier than buying jet kerosene on the spot market.

"It's too dangerous to do any kind of hedging now," China Airlines chairman Philip Wei (魏幸雄) said May 9.

"Since last October until now, we did two or three transactions, no more," Wei said.

"We don't do any hedging now," he said.

The company joins Cathay Pacific Airways Ltd in reducing its use of hedging as forecasters differ on the outlook for oil prices. The US government predicts benchmark crude in New York will fall to an average of US$62.23 a barrel last year, 5.7 percent lower from last year.

"Less hedging may make the stock more attractive, as it means earnings will be more predictable," said Hank Chen, who manages US$21 million worth of assets for National Investment Trust Co in Taipei and doesn't own China Airlines shares.

"Excessive or inadequate hedging may lead to losses," he said.

In the interview, Wei also said China Airlines would pick either Boeing Co or Airbus SAS before the end of the year for an order for more than 10 planes.

This will be the airline's biggest deal since agreeing to buy a total of 22 aircraft worth as much as US$3.7 billion from the two plane makers in December 2002.

China Airlines' proportion of hedging has fallen to 20 percent from 60 percent a year ago, Wei said.

Company spokesman Johnson Sun (孫鴻文) declined to comment on whether the carrier has made or lost money from hedging in the past.

Cathay Pacific, Hong Kong's largest carrier, has hedged 9 percent of its fuel requirements for next year, spokeswoman Carolyn Leung said yesterday, compared with 40 percent of future needs at the same point a year ago.

The price of oil "is still higher than we want," Wei said.

Fuel accounts for about 40 percent of the carrier's costs, he said.

Shares of China Airlines fell 0.7 percent to close at NT$14.55 in Taipei. The stock has declined 4.3 percent this year, compared to a 2.7 percent gain in the benchmark TAIEX index.

Wei, 65, has reduced the number of aircraft types operated by China Airlines and is buying more fuel-efficient planes to cut the carrier's maintenance and fuel costs.

The airline will order Airbus A380s or Boeing 747-8s for services to the US and Europe, Wei said.

It will also buy smaller planes, either A350s or Boeing 787s, he added.

"It'll make more sense if they buy from Boeing, as it'll be easier for maintenance to have airplanes from the same company," said Peter Tzeng (曾耀德), an analyst at Polaris Securities Co (寶來證券), who has an "equalweight" recommendation on the stock.

The airline's fleet of 69 aircraft includes 36 Boeing 747-400 passenger planes and freighters. The company also has 12 Boeing 737-800s, 14 Airbus 330-300s and seven Airbus 340-300s. The average age of the planes is 5.1 years.

Carriers such as Malaysian Airline System Bhd are expanding their fleets as travel in the Asia-Pacific region increases. Wei is adding new planes also to maintain the airline's advantage of owning one of the youngest fleets in the region.

New planes "help the company become more competitive," said Francis Hsiao (蕭義展), an analyst with Grand Cathay Securities Co (大華證券) who has put a "hold" recommendation on the stock.
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